**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





(Mark One)


x
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the twenty-six weeks endedJuly
                  1, 2006o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934For
                  the transition period from _______to
                  _______




Commission
      File Number 1-5084




**TASTY
      BAKING COMPANY**


(Exact
      name of Company as specified in its charter)




Pennsylvania
            23-1145880(State
                of Incorporation)
            (IRS
                Employer Identification Number)




**2801
      Hunting Park Avenue, Philadelphia, Pennsylvania 19129**


(Address
      of principal executive offices including Zip Code)





**215-221-8500**


(Company's
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES x NO
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated Filer o   Accelerated
      Filer  x   Non-accelerated
      Filer o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


YES
oNO x




There
      were
      8,235,121 shares of Common Stock outstanding as of August 1, 2006.









**TASTY
      BAKING COMPANY AND SUBSIDIARIES**




**INDEX**




PART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance SheetsJuly
                1, 2006 and December 31, 2005
            3Consolidated
                Statements of OperationsThirteen
                and Twenty-six weeks ended July 1, 2006 and June 25, 2005
            4Consolidated
                Statements of Cash FlowsTwenty-six
                weeks ended July 1, 2006 and June 25, 2005
            5Notes
                to Consolidated Financial Statements
            6-14Item
                2.
            Management's
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            15-20Item
                3.
            Quantitative
                and Qualitative DisclosuresAbout
                Market Risk
            20Item
                4.
            Controls
                and Procedures
            20PART
                II.
            OTHER
                INFORMATIONItem
                4.
            Submission
                of Matters to a Vote of Security Holders
            22Item
                5.
            Other
                Information
            22Item
                6.
            Exhibits
            23Signature
            
            24




2





**Part
      I.**  **FINANCIAL
      INFORMATION**


**Item
      1.**  **Financial
      Statements**





**TASTY
      BAKING COMPANY AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(Unaudited)


(000’s)


**July
                1, 2006**
            
            **December
                31, 2005****Assets****Current
                assets:**Cash
            
            $
            140
            
            $
            251Receivables,
                less allowance of$2,552
                and $3,272, respectively
            
            
            20,389
            
            
            18,389Inventories
            
            
            6,461
            
            
            6,472Deferred
                income taxes
            
            
            2,127
            
            
            2,127Prepayments
                and other
            
            
            1,227
            
            
            1,769Total
                current assets
            
            
            30,344
            
            
            29,008**Property,
                plant and equipment:**Land
            
            
            1,433
            
            
            1,433Buildings
                and improvements
            
            
            42,946
            
            
            42,282Machinery
                and equipment
            
            
            138,963
            
            
            136,392183,342
            
            
            180,107Less
                accumulated depreciation
            
            
            116,834
            
            
            113,85966,508
            
            
            66,248**Other
                assets:**Long-term
                receivables from independent sales distributors
            
            
            11,069
            
            
            10,700Deferred
                income taxes
            
            
            13,113
            
            
            13,251Other
            
            
            2,476
            
            
            2,10026,658
            
            
            26,051**Total
                assets**
            
            $
            123,510
            
            $
            121,307**Liabilities****Current
                liabilities:**Current
                obligations under capital leases
            
            $
            549
            
            $
            534Notes
                payable, banks
            
            
            631
            
            
            631Book
                overdraft
            
            
            2,168
            
            
            3,482Accounts
                payable
            
            
            4,614
            
            
            3,934Accrued
                payroll and employee benefits
            
            
            7,074
            
            
            6,810Reserve
                for restructures
            
            
            45
            
            
            247Other
            
            
            4,762
            
            
            3,734Total
                current liabilities
            
            
            19,843
            
            
            19,372Long-term
                obligations under capital leases, less current portion
            
            
            256
            
            
            534Long-term
                debt
            
            
            23,592
            
            
            22,558Accrued
                pensions and other liabilities
            
            
            24,562
            
            
            24,599Postretirement
                benefits other than pensions
            
            
            16,244
            
            
            16,955**Total
                liabilities**
            
            
            84,497
            
            
            84,018**Shareholders'
                equity**Common
                stock
            
            
            4,558
            
            
            4,558Capital
                in excess of par value of stock
            
            
            28,982
            
            
            28,910Retained
                earnings
            
            
            23,742
            
            
            22,47257,282
            
            
            55,940Less:Accumulated
                other comprehensive loss
            
            
            5,987
            
            
            6,287Treasury
                stock, at cost
            
            
            12,282
            
            
            11,912Stock
                compensation arrangements, receivables and deferrals
            
            
            —
            
            
            452Total
                shareholders' equity
            
            
            39,013
            
            
            37,289**Total
                liabilities and shareholders' equity**
            
            $
            123,510
            
            $
            121,307




See
      Notes
      to Consolidated Financial Statements.




3




**TASTY
      BAKING COMPANY AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Unaudited)


(000’s,
      except per share amounts)


**For
                  the Thirteen Weeks Ended**
              
              **For
                  the Twenty-Six Weeks Ended****July
                  1, 2006**
              
              **June
                  25, 2005**
              
              **July
                  1, 2006**
              
              **June
                  25, 2005****Gross
                  sales**
              
              $
              67,909
              
              $
              69,580
              
              $
              137,241
              
              $
              135,526Less
                  discounts and allowances
              
              
              (25,348
              )
              
              (25,850
              )
              
              (51,771
              )
              
              (50,642
              )Net
                  sales
              
              
              42,561
              
              
              43,730
              
              
              85,470
              
              
              84,884**Costs
                  and expenses:**Cost
                  of sales
              
              
              25,599
              
              
              27,125
              
              
              52,419
              
              
              53,149Depreciation
              
              
              1,626
              
              
              1,661
              
              
              3,168
              
              
              3,462Selling,
                  general and administrative
              
              
              13,419
              
              
              13,526
              
              
              26,363
              
              
              26,181Interest
                  expense
              
              
              412
              
              
              326
              
              
              787
              
              
              647Other
                  income, net
              
              
              (274
              )
              
              (242
              )
              
              (574
              )
              
              (480
              )40,782
              
              
              42,396
              
              
              82,163
              
              
              82,959Income
                  before provision forincome
                  taxes
              
              
              1,779
              
              
              1,334
              
              
              3,307
              
              
              1,925**Provision
                  for income taxes**
              
              
              644
              
              
              448
              
              
              1,218
              
              
              560**Net
                  income**
              
              $
              1,135
              
              $
              886
              
              $
              2,089
              
              $
              1,365**Average
                  common shares outstanding:**Basic
              
              
              8,052
              
              
              8,056
              
              
              8,052
              
              
              8,060Diluted
              
              
              8,236
              
              
              8,159
              
              
              8,250
              
              
              8,163**Per
                  share of common stock:**Net
                  income:Basic
              
              $
              0.14
              
              $
              0.11
              
              $
              0.26
              
              $
              0.17Diluted
              
              $
              0.14
              
              $
              0.11
              
              $
              0.25
              
              $
              0.17Cash
                  dividend
              
              $
              0.05
              
              $
              0.05
              
              $
              0.10
              
              $
              0.10




See
        Notes
        to Consolidated Financial Statements.
  4


**TASTY
      BAKING COMPANY AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOW**


(Unaudited)


(000’s)


**For
                  the Twenty-Six Weeks Ended****July
                  1, 2006**
              
              **June
                  25, 2005 (a)****Cash
                  flows from (used for) operating activities**Net
                  income
              
              $
              2,089
              
              $
              1,365Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Depreciation
              
              
              3,168
              
              
              3,462Gain
                  on sale of routes
              
              
              (6
              )
              
              —Restructure
                  payments
              
              
              (202
              )
              
              (343
              )Pension
                  expense
              
              
              6
              
              
              167Deferred
                  taxes
              
              
              (52
              )
              
              (124
              )Post
                  retirement medical
              
              
              (711
              )
              
              (99
              )Other
              
              
              404
              
              
              466Changes
                  in assets and liabilities:Increase
                  in receivables
              
              
              (2,260
              )
              
              (2,629
              )(Increase)
                  decrease in inventories
              
              
              11
              
              
              (378
              )Decrease
                  in prepayments and other
              
              
              707
              
              
              329Increase
                  in accrued taxes
              
              
              914
              
              
              395Increase
                  (decrease) in accounts payable, accruedpayroll
                  and other current liabilities
              
              
              1,058
              
              
              (4,021
              )**Net
                  cash provided from (used for) operating activities**
              
              
              5,126
              
              
              (1,410
              )**Cash
                        flows from (used for) investing activities**Proceeds
                  from sale of property, plant and equipment
              
              
              75
              
              
              —Purchase
                  of property, plant and equipment
              
              
              (3,683
              )
              
              (1,287
              )Proceeds
                  from independent sales distributor loan repayments
              
              
              2,277
              
              
              2,299Loans
                  to independent sales distributors
              
              
              (2,362
              )
              
              (2,483
              )Other
              
              
              (183
              )
              
              (90
              )**Net
                  cash used for investing activities**
              
              
              (3,876
              )
              
              (1,561
              )**Cash
                  flows from (used for) financing activities**Dividends
                  paid
              
              
              (818
              )
              
              (817
              )Payment
                  of long-term debt
              
              
              (579
              )
              
              (356
              )Net
                  increase in short-term debt
              
              
              —
              
              
              1,900Additional
                  long-term debt
              
              
              1,350
              
              
              1,000Net
                  increase (decrease) in book overdraft
              
              
              (1,314
              )
              
              1,345Purchase
                  of treasury stock
              
              
              —
              
              
              (93
              )**Net
                  cash from (used for) financing activities**
              
              
              (1,361
              )
              
              2,979**Net
                  increase (decrease) in cash**
              
              
              (111
              )
              
              8Cash,
                  beginning of year
              
              
              251
              
              
              208Cash,
                  end of period
              
              $
              140
              
              $
              216**Supplemental
                  Cash Flow Information**Cash
                  paid (refunded) during the period for:Interest
              
              $
              834
              
              $
              320Income
                  taxes
              
              $
              32
              
              $
              (47
              )




(a)
                  Amounts have been reclassified for comparative purposes.


See
        Notes
        to Consolidated Financial Statements.


5


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(000’s,
      except share and per share amounts)


All
      disclosures are pre-tax, unless otherwise noted.





**1.**  **Summary
      of Significant Accounting Policies**





***Nature
      of the Business***


Tasty
      Baking Company is a leading producer of sweet baked goods and one of the
      nation’s oldest and largest independent baking companies, in operation since
      1914. It has two manufacturing facilities, one in Philadelphia, PA, and a second
      in Oxford, PA.





***Fiscal
      Year***


The
      company and its subsidiaries operate on a 52-53 week fiscal year, ending on
      the
      last Saturday of December. Fiscal year 2006 is a 52-week year. Fiscal 2005
      was a
      53-week year.





***Basis
      of Consolidation***


The
      consolidated financial statements include the accounts of the company and its
      subsidiaries. Inter-company transactions are eliminated.





***Interim
      Financial Information***


In
      the
      opinion of management, the accompanying unaudited consolidated financial
      statements contain all adjustments, consisting only of normal and recurring
      adjustments, necessary to present fairly the financial position of the company
      as of July 1, 2006 and December 31, 2005, the results of its operations for
      the
      thirteen and twenty-six weeks ended July 1, 2006 and June 25, 2005, and cash
      flows for the twenty-six week period ended July 1, 2006 and June 25, 2005,
      respectively. These unaudited consolidated financial statements should be read
      in conjunction with the consolidated financial statements and footnotes thereto
      in the company’s 2005 Form 10-K. In addition, the results of operations for the
      thirteen weeks and twenty-six weeks ended July 1, 2006 are not necessarily
      indicative of the results to be expected for the full year.





***Use
      of Estimates***


Certain
      amounts included in the accompanying consolidated financial statements and
      related footnotes reflect the use of estimates based on assumptions made by
      management. These estimates are made using all information available to
      management, and management believes that these estimates are as accurate as
      possible as of the dates and for the periods that the financial statements
      are
      presented. Actual amounts could differ from these estimates. Significant
      estimates for the company include customer discounts and allowances, long-lived
      asset impairment, pension, employee insurance and postretirement plan expense,
      workers’ compensation expense and income tax valuation.





***Concentration
      of Credit*** **


The
      company encounters, in the normal course of business, exposure to concentrations
      of credit risk with respect to trade receivables. Ongoing credit evaluations of
      customers’ financial conditions are performed and, generally, no collateral is
      required. The company maintains reserves for potential credit losses and such
      losses have not exceeded management’s expectations.





***Revenue
      Recognition***


Revenue
      is
      recognized when title and risk of loss pass, which is upon receipt of goods
      by
      the independent sales distributors, retailers or third-party distributors.
      For
      route area sales, the company sells to independent sales distributors who,
      in
      turn, sell to retail customers. Revenue for sales to independent sales
      distributors is recognized upon receipt of the product by the distributor.
      For
      sales made directly to a retail customer or a third-party distributor, revenue
      is recognized upon receipt of the products by the retail customer or third-party
      distributor.





***Sale
      of Routes***


Sales
      distribution routes are owned by independent sales distributors who purchase
      the
      exclusive right to sell and distribute Tastykake products in defined
      geographical territories. When the company sells routes to independent sales
      distributors, it recognizes a gain or loss on the sale. Routes sold by the
      company are either existing routes that the company has previously purchased
      from an independent sales distributor or newly established routes in new
      geographies. Any gain or loss recorded by the company is based on the difference
      between the sales price and the carrying value of the route, and is recorded
      as
      a separate line item in the consolidated statements of operations. Any potential
      impairment of net carrying value is reserved as identified. The company
      recognizes gains on sales of routes because all material




6




services
      or conditions related to the sale have been substantially performed or satisfied
      by the company as of the date of sale. In most cases, the company will finance
      a
      portion of the purchase price with interest bearing notes. Interest rates on
      the
      notes are based on treasury yields plus a spread. The notes require full
      repayment of the loan amount. The company has no obligation to later repurchase
      a route but may choose to do so to facilitate a change in route
      ownership.





***Cash
      and Cash Equivalents***


The
      company considers all investments with an original maturity of three months
      or
      less on their acquisition date to be cash equivalents. Book overdrafts are
      recorded within current liabilities. Cash flows associated with book overdrafts
      are classified as financing activities. During 2005, the company revised the
      classification for book overdrafts in the Consolidated Balance Sheet and the
      Consolidated Statements of Cash Flows. They were previously reported as an
      operating activity. The revised classifications have also been reflected in
      the
      comparative prior year amounts for purposes of consistency.





***Inventory
      Valuation***


Inventories,
      which include material, labor and manufacturing overhead, are stated at the
      lower of cost or market, cost being determined using the first-in, first-out
      (“FIFO”) method. Inventory balances for raw materials, work in progress, and
      finished goods are regularly analyzed and provisions for excess and obsolete
      inventory are recorded, if necessary, based on the forecast of product demand
      and production requirements.





Spare
      parts, which are recorded as property, plant and equipment, are reviewed for
      potential obsolescence on a quarterly basis. Reserves are established for all
      spare parts that are no longer usable and have no fair market value to the
      company.





***Property
      and Depreciation***


Property,
      plant and equipment are carried at cost. Depreciation is computed by the
      straight-line method over the estimated useful lives of the assets. Buildings
      and improvements are depreciated over thirty-nine years. Machinery and equipment
      are depreciated over a range of seven to fifteen years. Spare parts are
      capitalized as part of machinery and equipment and are expensed as utilized.
      Capitalized computer hardware and software is depreciated over five
      years.





Costs
      of
      major additions, replacements and improvements are capitalized, while
      maintenance and repairs which do not improve or extend the life of the
      respective assets, are expensed as incurred.





For
      significant projects, the company capitalizes interest and labor costs
      associated with the construction and installation of plant and equipment and
      significant information technology development projects.





In
      accordance with Statement of Financial Accounting Standard No.144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets ”, long-lived
      assets are reviewed for impairment at least annually or whenever events or
      changes in circumstances indicate that the carrying amount may not be
      recoverable. In instances where the carrying amount may not be recoverable,
      the
      review for potential impairment utilizes estimates and assumptions of future
      cash flows directly related to the asset. For assets where there is no plan
      for
      future use, the review for impairment includes estimates and assumptions of
      the
      fair market value of the asset, which is based on the best information available
      to the company. These assets are recorded at the lower of their book value
      or
      market value.





In
      accordance with Financial Accounting Standards Board Interpretation 47,
“Accounting for Conditional Asset Retirement Obligations,” the company must
      recognize liabilities for obligations related to asset retirement activities
      in
      which the timing and (or) method of settlement are conditional on a future
      event
      when it can reasonably estimate the fair value of each conditional asset
      retirement obligation. In December 2005, the company purchased from its Pension
      Plan the Philadelphia production facility (the “Hunting Park Bakery”), which
      contains asbestos. The Company is not under any current obligation to remove
      the
      asbestos since it is encased and in compliance with current regulatory codes.
      The company may have an obligation to remove the asbestos if the facility were
      to undergo a major renovation or to be demolished. The company has no current
      plans to dispose, demolish or perform any major renovations. Because the company
      has not made any decision to retire, sell, demolish or abandon the facility,
      the
      fair value of the conditional asset retirement obligation cannot be determined.
      For the same reason, the company cannot recognize a liability for the potential
      removal of asbestos because it cannot reasonably estimate the fair value of
      the
      obligation. The company does not have sufficient information because the
      settlement date or range of potential settlement dates is not estimable at
      this
      time and therefore sufficient information is not available to apply an expected
      present value technique.





7


***Grants***


The
      company receives grants from various Commonwealth of Pennsylvania agencies
      which
      reimburse the company for specific training expenses. The company records
      receipt of these grants as an offset to the related expense.





During
      the
      second quarter of 2006, in partnership with The Reinvestment Fund, Allegheny
      West Foundation, and the Department of Community and Economic Development of
      the
      Commonwealth of Pennsylvania (the “DCED”), the company activated Project Fresh
      Start (the “Project”). The Project is an entrepreneurial development program
      that provides a unique opportunity for qualified minority entrepreneurs to
      purchase company distribution routes in the City of Philadelphia. The source
      of
      grant monies for this program is the DCED, and the funds are distributed
      directly to qualifying applicants selected by the partners in the Project.
      The
      grant monies pass through the company, and an offsetting asset and liability
      are
      recorded for the total amount of any outstanding, unearned grants.





***Marketing
      Costs***


The
      company expenses marketing costs, which include advertising and consumer
      promotions, as incurred. Marketing costs are included as a part of selling,
      general and administrative expense.





***Computer
      Software Costs***


The
      company capitalizes certain costs, such as software coding, installation and
      testing that are incurred to purchase or create and implement internal use
      computer software in accordance with Statement of Position 98-1, “Accounting for
      Costs of Computer Software Development or Obtained for Internal Use.” The
      majority of the company’s capitalized software relates to the implementation of
      the enterprise resource planning (“ERP”) and handheld computer
      systems.





***Freight,
      Shipping and Handling Costs***


Outbound
      freight, shipping and handling costs are included as a part of selling, general
      and administrative expense. Inbound freight, shipping and handling costs are
      capitalized with inventory and expensed with cost of goods sold.





***Pension
      Plan***


The
      company’s funding policy for the defined benefit pension plan (the “DB Plan”) is
      to contribute amounts deductible for federal income tax purposes plus such
      additional amounts, if any, as the company’s actuarial consultants advise to be
      appropriate. In 1987 the company elected to immediately recognize all gains
      and
      losses in excess of the pension corridor.





The
      company accrues normal periodic pension expense or income during the year based
      upon certain assumptions and estimates from its actuarial consultants in
      accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” These
      estimates and assumptions include discount rate, rate of return on plan assets,
      compensation increases, mortality, and employee turnover. In addition, the
      rate
      of return on plan assets is directly related to changes in the equity and credit
      markets, which can be very volatile. The use of the above estimates and
      assumptions, market volatility and the company’s election to immediately
      recognize all gains and losses in excess of its pension corridor in the current
      year may cause the company to experience significant changes in its pension
      expense or income from year to year. Expense or income that falls outside the
      corridor is recognized only in the fourth quarter of each year.





Effective
      July 26, 2006, the FASB announced that it would be amending SFAS 87 and related
      pronouncements for public companies effective for years ending after December
      15, 2006. The details of these changes have not been finalized and when they
      are, the company will evaluate any impact on the financial
      statements.





The
      company amended the DB Plan to freeze benefit accruals effective March 26,
      2005.
      Participants will be credited for service after March 26, 2005 solely for
      vesting purposes pursuant to the terms of the DB Plan. Each vested participant
      will receive their total pension benefit accrued through March 26, 2005 upon
      retirement from the company.





Effective
      March 27, 2005, the company adopted a new company funded retirement plan, which
      is a defined contribution benefit (the “DC Plan”) that replaces the benefit
      provided in the DB Plan. In the DC Plan, the company contributes cash weekly
      into individual accounts for eligible employees. These contributions are equal
      to a percentage of an employee’s eligible compensation and increase in
      pre-established increments based on a combination of the employee’s age and
      years of credited service.





***Accounting
      for Derivative Instruments***


The
      company has entered into certain variable-to-fixed interest rate swap contracts
      to fix the interest rates on a portion of its variable interest rate debt.
      These
      swap contracts are accounted for as cash flow hedges as per the criteria in
      SFAS
      No. 133, “Accounting for Derivative and Hedging Activities,” as amended and
      interpreted. Accordingly, these derivatives




8




are
      marked
      to market and the resulting gains or losses are recorded in other comprehensive
      income as an offset to the related hedge asset or liability. The actual interest
      expense incurred, inclusive of the effect of the hedge in the current period,
      is
      recorded in the Statement of Operations. The amount of other comprehensive
      income resulting from these derivatives is included in the notes to the
      consolidated financial statements.





***Treasury
      Stock***


Treasury
      stock is stated at cost. Cost is determined by the FIFO method.





***Accounting
      for Income Taxes***


The
      company accounts for income taxes under the asset and liability method. Deferred
      tax assets and liabilities are determined based on differences between financial
      reporting and tax basis of assets and liabilities and are measured using the
      enacted tax rates in effect when the differences are expected to be recovered
      or
      settled.





***Net
      Income Per Common Share***


Net
      income
      per common share is presented as basic and diluted earnings per share. Net
      income per common share - Basic is based on the weighted average number of
      common shares outstanding during the year. Net income per common share - Diluted
      is based on the weighted average number of common shares and dilutive potential
      common shares outstanding during the year. Dilution is the result of outstanding
      stock options and restricted shares.





***Share-based
      Compensation***


The
      company adopted SFAS 123(R), Share-Based Payment (“FAS 123(R)”), using the
      modified prospective transition method, which requires the application of the
      accounting standard as of January 1, 2006, the first day of the company’s fiscal
      year 2006. The company’s consolidated financial statements as of and for the
      period ending July 1, 2006, reflect the impact of FAS 123(R). In accordance
      with
      the modified prospective transition method, the company’s consolidated financial
      statements for prior periods have not been restated to reflect, and do not
      include, the impact of FAS 123(R).





Share-based
      compensation expense recognized during the current period is based on the value
      of the portion of share-based payment awards that is ultimately expected to
      vest. The total value of compensation expense for restricted stock is equal
      to
      the ending price of Tasty Baking Company shares on the date of grant. FAS 123(R)
      requires forfeitures to be estimated at the time of grant in order to estimate
      the amount of share-based awards that will ultimately vest. The forfeiture
      rate
      is based on the company’s historical forfeiture experience.





The
      company is in the process of calculating any applicable historical pool of
      windfall tax benefits.





***Recent
      Accounting Statements***


In
      July
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertain Tax
      Positions, an Interpretation of FAS 109 ** (“FIN
      48”), which clarifies the criteria for recognition and measurement of benefits
      from uncertain tax positions. Under FIN 48, an entity should recognize a tax
      benefit when it is “more-likely-than-not”, based on the technical merits, that
      the position would be sustained upon examination by a taxing authority. The
      amount to be recognized should be measured as the largest amount of tax benefit
      that is greater than 50 percent likely of being realized upon ultimate
      settlement with a taxing authority that has full knowledge of all relevant
      information. Furthermore, any change in the recognition, derecognition or
      measurement of a tax position should be recognized in the interim period in
      which the change occurs. FIN 48 is effective January 1, 2007, for the company
      and any change in net assets as a result of applying the Interpretation will
      be
      recognized as an adjustment to retained earnings on that date. Management is
      in
      the process of evaluating its uncertain tax positions in accordance with FIN
      48.




**2.**  **Restructure
      Charges**





From
      fiscal years 2001 to 2005, the company implemented several strategies that
      resulted in restructuring charges. In the fourth quarter 2005, the company
      incurred a $145 restructure charge related to specific arrangements made with
      certain employees who departed the company. Also in the fourth quarter 2005,
      the
      company incurred a $77 restructure charge related to rent, utility and security
      charges for closed thrift stores that were previously underestimated and the
      company reclassified $208 of the restructuring liability related to accrued
      liabilities for ongoing services to certain employees who departed the company.
      The company recognized net restructure charge reversals in 2005 of $151.





9


**RESTRUCTURE
      RESERVE ACTIVITY**


**Lease
                  obligations**
              
              **Severance**
              
              **Other**
              
              **Total****Balance****December
                  25, 2004**
              
              **$**
              **407**
              
              **$**
              **592**
              
              **$**
              **38**
              
              **$**
              **1,037**2005
                  Restructure charges
              
              
              —
              
              
              136
              
              
              9
              
              
              **145**2005
                  Reclassification of severance related items
              
              
              —
              
              
              (208
              )
              
              —
              
              
              **(208**
              **)**2005
                  Reversal of reserve, net of adjustments
              
              
              40
              
              
              (151
              )
              
              37
              
              
              **(74**
              **)**2005
                  Payments
              
              
              (319
              )
              
              (281
              )
              
              (53
              )
              
              **(653**
              **)****Balance
                  December 31, 2005**
              
              
              **128**
              
              
              **88**
              
              
              **31**
              
              
              **247**Q1
                  2006 Payments
              
              
              (54
              )
              
              (88
              )
              
              (3
              )
              
              **(145**
              **)****Balance
                  April 1, 2006**
              
              
              **74**
              
              
              —
              
              
              **28**
              
              
              **102**Q2
                  2006 Payments
              
              
              (43
              )
              
              —
              
              
              (14
              )
              
              (57
              )**Balance
                  July 1, 2006**
              
              **$**
              **31**
              
              **$**
              **—**
              
              **$**
              **14**
              
              **$**
              **45**




The
      balance of the lease obligations and other charges are expected to be paid
      as of
      November 2006.




**3.**  **Inventories**





Inventories
      are classified as follows:


**July
                  1, 2006**
              
              **Dec.
                  31, 2005**Finished
                  goods
              
              $
              1,287
              
              $
              1,556Work
                  in progress
              
              
              161
              
              
              173Raw
                  materials and supplies
              
              
              5,013
              
              
              4,743$
              6,461
              
              $
              6,472




**4.**  **Credit
      Facility**





On
      September 13, 2005, the company entered into an Amended and Restated Credit
      Agreement (“Amended Credit Agreement”) to replace its prior credit facility. The
      Amended Credit Agreement increased the commitment from $30 million to $35
      million; changed the terms from secured to unsecured; extended the maturity
      from
      a three year term to a five year term expiring in September 2010; eliminated
      the
      short term portion and reduced the interest rate margins and the commitment
      fees
      charged to the company as described in the Amended Credit Agreement.
      Modifications were also made to the Tangible Net Worth covenant and the Funded
      Debt covenant that make them less restrictive. Interest rates in the Amended
      Credit Agreement are indexed to LIBOR based upon the company’s ratio of debt to
      EBITDA and rates may decrease up to 50 basis points based on that ratio.
      Commitment fees are charged on the unused portion of the commitment and range
      from 10 to 30 basis points based upon the same ratio used to determine interest
      rates. The proceeds from the Amended Credit Agreement are being used for general
      corporate purposes and such other uses as permitted.





On
      September 13, 2005, the company also entered into a term loan for $5.3 million.
      The term loan is based upon a 15 year amortization with a scheduled maturity
      in
      five years due in September 2010. The terms and conditions of the term loan
      are
      generally the same as those in the Amended Credit Agreement. The entire proceeds
      of the term loan were used to fund a voluntary contribution to the company’s
      previously frozen DB Plan.





On
      December 20, 2005, the company also entered into a mortgage loan for $2.15
      million and a second term loan for $2.55 million to fund the purchase of the
      Hunting Park Bakery building and land for $4.7 million from the company’s DB
      Plan. The mortgage loan is based upon a 20 year amortization with a scheduled
      maturity in ten years due in December 2015. The term loan is based upon a 15
      year amortization with a scheduled maturity in five years due September 2010.
      The terms and conditions of the mortgage loan and the term loan are generally
      the same as those in the Amended Credit Agreement.





In
      order
      to hedge a portion of the company’s exposure to changes in interest rates the
      company entered into a five-year $6 million interest rate swap on August 3,
      2005
      with a fixed LIBOR rate of 4.64%. The company also entered into two five-year
      interest rate swaps for its term loans for $5.3 and $2.55 million on September
      13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99% respectively.
      Additionally, on December 21, 2005 the company entered into a ten-year $2.15
      million interest rate swap for its mortgage loan with a fixed LIBOR rate of
      5.08%. The total notional amount for




10




all
      swaps
      is $16 million, and the LIBOR rates above are subject to an additional credit
      spread which can range from 75 basis points to 140 basis points.




**5.**  **Defined
      Benefit Retirement Plans**





The
      company maintains a partially funded DB Plan providing retirement benefits.
      Benefits under this DB Plan generally are based on the employee’s years of
      service and compensation during the years preceding retirement. The company
      maintains an unfunded Supplemental Executive Retirement Plan (“SERP”) providing
      retirement benefits for key employees designated by the Board of Directors.
      At
      this time, none of the participants in the defined benefit SERP are employed
      by
      the company. Benefits under the SERP generally are based on the key employees’
years of service and compensation during the years preceding retirement. The
      company also maintains an unfunded Directors’ Retirement Plan. The benefit
      amount is the annual retainer in the year of retirement.





In
      December 2004, upon approval by the Board of Directors, the company announced
      to
      its employees that it was amending the DB Plan to freeze benefit accruals
      effective March 26, 2005. Participants will be credited for service after March
      26, 2005, solely for vesting purposes pursuant to the terms of the DB Plan.
      Each
      vested participant will receive their total defined benefit pension accrued
      through March 26, 2005, upon retirement from the company.





Effective
      March 27, 2005, the company adopted a new company DC Plan which is a defined
      contribution benefit that replaces the benefit provided in the DB Plan. See
      Note
      6 in the financial statements.





Significant
      transactions between the company and the DB Plan that occurred during 2005
      were:
      (1) a tax deductible cash contribution of $5.3 million made on September 13,
      2005; and (2) the company’s purchase of the Hunting Park Bakery from the DB Plan
      on December 20, 2005 for $4.7 million. The $5.3 million contribution was made
      to
      improve the cash funded status of the DB Plan. The purchase of the Hunting
      Park
      Bakery was made to reduce interest costs to the company and to further improve
      the funded status of the DB Plan. Prior to the purchase, the company recorded
      its use of the Hunting Park Bakery as a capital lease with the DB Plan. The
      purchase price of $4.7 million for the Hunting Park Bakery was determined by
      the
      terms of its lease agreement and exceeded the DB Plan’s book value for the asset
      by approximately $1.6 million. The terms of the lease agreement were drafted
      in
      1984 to comply with specific guidelines established by the Department of Labor
      that permitted the continued lease of the Hunting Park Bakery as an exemption
      to
      ERISA’s prohibited transaction rules. Both of these transactions were funded
      with the proceeds of the term loan and mortgage loan.





The
      components of the DB pension, SERP, and Directors’ Retirement plans cost are
      summarized as follows:


**Thirteen
                  Weeks Ended**
              
              **Twenty-six
                  Weeks Ended****7/1/06**
              
              **6/25/05**
              
              **7/1/06**
              
              **6/25/05**Service
                  cost-benefits earned during the year
              
              $
              6
              
              $
              131
              
              $
              12
              
              $
              262Interest
                  cost on projected benefit obligation
              
              
              1,242
              
              
              1,209
              
              
              2,484
              
              
              2,418Expected
                  return on plan assets
              
              
              (1,269
              )
              
              (1,266
              )
              
              (2,534
              )
              
              (2,532
              )Prior
                  service cost amortization
              
              
              (4
              )
              
              (5
              )
              
              (8
              )
              
              (9
              )SERP
                  amendment
              
              
              26
              
              
              14
              
              
              52
              
              
              28Net
                  pension amount charged to income
              
              $
              1
              
              $
              83
              
              $
              6
              
              $
              167
  **6.**  **Defined
      Contribution Retirement Plans**





Effective
      March 27, 2005, the company adopted a new DC Plan which is a defined
      contribution benefit that replaces the benefit provided in the DB Plan. In
      the
      new DC Plan, the company will make cash contributions into individual accounts
      for all eligible employees. These contributions will be equal to a percentage
      of
      an employee’s eligible compensation and will increase with the employee’s age
      and years of credited service.





Effective
      March 27, 2005, the company merged the Tasty Baking Oxford, Inc. 401(k) Savings
      Plan (“Oxford Plan”) into the Tasty Baking Company 401(k) Thrift Plan (“Thrift
      Plan”) and renamed the merged plans as the Tasty Baking Company 401(k) and
      Company Funded Retirement Plan (“Retirement Plan”). All assets of the Oxford
      Plan were transferred to the Retirement Plan immediately after the effective
      date of the merger. In the Retirement Plan, all participants receive a company
      match equal to 50% of their elective deferrals that do not exceed 4% of their
      compensation as defined in the Retirement Plan. In the Retirement Plan, the
      waiting period for participation has been




11




eliminated.
      Participants are offered a broad array of investment choices.





In
      addition, as a replacement for the company’s DB Plan which was frozen as of
      March 26, 2005, the company will make weekly contributions to the Retirement
      Plan for all eligible employees. As noted above, these contributions are based
      on employees’ point values which are the sum of age and years of service as of
      January 1 each year. All employees will receive contributions that range from
      2%
      to 5% of eligible compensation relative to their point totals. In addition,
      all
      employees at March 27, 2005, who had 20 years of service, or 10 years of service
      and 60 points, will receive an additional weekly “grandfathered” contribution of
      between 1.5% and 3.5% of salary. This “grandfathered” contribution percentage is
      fixed as of March 27, 2005, and will be paid weekly with the regular
      contribution until those covered employees retire or separate from the company.
      These “grandfathered” contributions are being made to compensate older employees
      for the shorter earnings period that their accounts will have to appreciate
      in
      value relative to their normal retirement dates.





Until
      March 27, 2005, the Thrift Plan permitted participants to make contributions
      to
      the plan on a pre-tax salary reduction basis in accordance with the provision
      of
      Section 401(k) of the Internal Revenue Code. After six months of employment,
      the
      company matched 100% of participants’ contributions up to a specified limit. The
      Thrift Plan was administered under a Section 401(k) prototype plan. Under the
      Thrift Plan, the company’s contributions were invested in Tasty Baking Company
      common stock, and participants were able to choose from a selection of
      guaranteed and mutual fund options offered by Dreyfus for investment of their
      contributions. The company also maintained the Oxford Plan for the employees
      who
      worked for its subsidiary, Tasty Baking Oxford, Inc. The Oxford Plan was similar
      to the Thrift Plan except that the company match was contributed in cash.





Effective
      October 2004, the company converted the SERP for one eligible active employee
      from an unfunded defined benefit to an unfunded defined contribution SERP to
      be
      consistent with the changes in the DC Plan.


**Thirteen
                  Weeks Ended**
              
              **Twenty-six
                  Weeks Ended****7/1/06**
              
              **6/25/05**
              
              **7/1/06**
              
              **6/25/05**Funded
                  retirement plan
              
              $
              455
              
              $
              501
              
              $
              935
              
              $
              501Defined
                  contribution SERP
              
              
              71
              
              
              47
              
              
              142
              
              
              94Net
                  pension amount charged to income
              
              $
              526
              
              $
              548
              
              $
              1,077
              
              $
              595




**7.**  **Postretirement
      Benefits Other than Pensions**





In
      addition to providing pension benefits, the company also provides certain
      unfunded health care and life insurance programs for a large number of its
      retired employees. These benefits are provided through contracts with insurance
      companies and health service providers.





Certain
      changes were made to the company’s postretirement benefits that resulted in a
      reduction of the projected benefit obligation. Effective November 1, 2005,
      the
      company announced that it was amending the medical benefits paid for retirees
      by
      eliminating coverage for most post-65 retirees as of January 1, 2006. Coverage
      will be maintained for all pre-65 retirees and for certain post-65 retirees
      who
      had qualifying dependents that were pre-65. This change was made in response
      to
      the implementation of Medicare Part D which made non-sponsored plans financially
      more favorable to most post-65 retirees. Changes to retiree life insurance
      benefits were also simultaneously announced with the medical benefit changes
      effective as of January 1, 2006. Life insurance for incumbent retirees at
      company group rates was capped at $20 of coverage. Incumbent retirees who
      purchase coverage in excess of $20 and all new retirees after January 1, 2006
      will pay age based rates for their life insurance benefit.





Components
      of net periodic postretirement benefit cost/(benefit):


**Thirteen
                  Weeks Ended**
              
              **Twenty-six
                  Weeks Ended****7/1/06**
              
              **6/25/05**
              
              **7/1/06**
              
              **6/25/05**Service
                  cost
              
              $
              63
              
              $
              122
              
              $
              125
              
              $
              219Interest
                  cost
              
              
              90
              
              
              163
              
              
              181
              
              
              365Amortization
                  of unrecognized prior service cost
              
              
              (411
              )
              
              (134
              )
              
              (822
              )
              
              (239
              )Amortization
                  of unrecognized gain
              
              
              (29
              )
              
              (25
              )
              
              (59
              )
              
              (25
              )Total
                  FAS 106 Net Postretirement Benefit Cost/(benefit)
              
              $
              (287
              )
              $
              126
              
              $
              (575
              )
              $
              320




12




Employer
      Contributions:


Estimated
      company contributions for the twenty-six weeks ended July 1, 2006 are
      $312.




**8.**  **Stock
      Compensation**





On
      May 11,
      2006, 5,000 shares of the company’s common stock were granted as a Restricted
      Stock Award (“RSA”) to a management employee of the company under the Tasty
      Baking Company 1997 Long Term Incentive Plan (“1997 Plan”). On March 24, 2006,
      2,000 shares of the company’s common stock were granted as a RSA to a director.
      On March 1, 2006, 129,000 shares of the company’s common stock were granted as
      RSAs to certain management employees. With respect to these March 2006 grants,
      42,000 shares were awarded under the Tasty Baking Company 2003 Long Term
      Incentive Plan (“2003 Plan”) and 89,000 shares were awarded under the 1997 Plan.
      Under the terms of each RSA, the recipients will fully vest in their shares
      5
      years after the grant date. Recipients of the RSAs forfeit all shares not vested
      prior to separation of employment. In 2006, 20,000 shares of this grant were
      forfeited. Recipients of the RSAs are permitted to vote and receive dividends
      on
      all shares granted. According to IRS regulations, dividends paid on the RSA
      are
      treated as employee compensation for income tax purposes.





On
      March
      24, 2006, the Board of Directors adopted the Tasty Baking Company 2006 Long
      Term
      Incentive Plan (“2006 Plan”), which was approved by shareholders at the 2006
      Annual Meeting of Shareholders. Under the terms of the 2006 Plan, 350,000 shares
      were authorized for issuance. On July 27, 2006, the Board approved a three-year
      restricted stock program. There were 250,000 shares from the 2006 Plan allocated
      to the program with 50,000 shares allocated to 2006 performance. Milestones
      were
      set for 2006 performance and the Compensation Committee will evaluate progress
      against the milestones in early 2007. It is intended that any restricted shares
      awarded in early 2007 will vest in 2009.





On
      August
      1, 2005, 10,000 options were granted to two new directors under the 2003 Plan.
      In addition, on May 12, 2005, 1,500 options were granted to employees of the
      company under the 1997 Plan.





On
      October
      29, 2004, 112,000 shares of the company’s common stock were granted as RSAs to
      certain management employees of the company under the 2003 Plan. Under the
      terms
      of the RSAs, recipients will fully vest in their shares 5 years after the grant
      date. Recipients of the RSAs forfeit all shares if not vested prior to
      separation of employment. The terms of the RSAs also provide for accelerated
      vesting. In the event that the closing price of the company’s common stock is at
      least $14 for 10 consecutive trading days, the vesting for the shares will
      shorten to three years, effective either on the tenth consecutive day of a
      $14
      closing price or the third anniversary of the RSAs, whichever is later.
      Recipients of the RSAs forfeit all shares not vested prior to separation of
      employment. In 2005, 30,000 shares of this grant were forfeited. In 2006, 15,000
      shares of this grant were forfeited. Recipients of the RSAs are permitted to
      vote and receive dividends on all shares granted. According to IRS regulations,
      dividends paid on the RSAs are treated as employee compensation for income
      tax
      purposes.





On
      December 16, 2005, the company’s Board of Directors and its Compensation
      Committee approved the acceleration of vesting of all outstanding, unvested
      stock options previously awarded to the company’s employees, officers (including
      executive officers) and directors under the company’s 1994, 1997 and 2003 Long
      Term Incentive Plans. All unvested stock options were “out-of-the-money” as of
      the closing stock price on December 16, 2005, with a range of exercise prices
      from $7.55 to $11.30 per share. As a result of the acceleration, stock options
      to acquire approximately 173,167 shares of the company’s common stock became
      exercisable on December 31, 2005, 85% of which were scheduled to vest during
      2006. Of the total number of shares underlying the accelerated stock options,
      approximately 27,998 were held by directors and 114,394 were held by executive
      officers.





All
      other
      terms and conditions applicable to these stock options, including exercise
      prices and holding period requirements, remained unchanged. The company had
      previously imposed a five-year holding period requirement on any shares obtained
      through the exercise of options awarded on or after August 7, 2003. Only 35,000
      of the then unvested options were not subject to this requirement, with the
      lowest exercise price on those options set at $8.60 per share. Accordingly,
      this
      holding period requirement is expected to prevent unintended benefits to the
      holders of the majority of these stock options as a result of this accelerated
      vesting. The purpose of this accelerated vesting was to enable the company
      to
      avoid recognizing compensation expense associated with these options in future
      periods as required by FAS 123(R) which the company adopted January 1, 2006.
      As
      a result of the acceleration of vesting, the company has reduced the non-cash,
      pre-tax compensation expense it would otherwise have been required to record
      by
      approximately $410 over the original option vesting period, including
      approximately $360 in fiscal 2006.




13




The
      option
      price is determined by the Compensation Committee of the Board and, in the
      case
      of incentive stock options, will be no less than the fair market value of the
      shares on the date of grant. Options lapse at the earlier of the expiration
      of
      the option term specified by the Compensation Committee of the Board (not more
      than ten years in the case of incentive stock options) or three months following
      the date on which employment with the company terminates.





Notwithstanding
      the vesting and termination provisions described above, under the terms of
      the
      Change of Control Agreements and Employment Agreements that the company entered
      into with certain executive officers, upon a change of control, the shares
      granted as RSAs vest and any restrictions on outstanding stock options lapse
      immediately. Additionally, under the terms of those agreements, in certain
      change of control circumstances, shares granted as RSAs may vest after
      termination of employment.




**9.**  **Comprehensive
      Income**





**Thirteen
                Weeks Ended**
            
            **Twenty-six
                Weeks Ended****7/1/06**
            
            **6/25/05**
            
            **7/1/06**
            
            **6/25/05**Net
                income as reported
            
            $
            1,135
            
            $
            886
            
            $
            2,089
            
            $
            1,365Other
                comprehensive income:Current
                year changes in fair value of derivativeinstruments
                qualifying as hedges, net of ($128), $0($200)
                and $0 income taxes, respectively (a)
            
            
            191
            
            
            —
            
            
            300
            
            
            —$
            1,326
            
            $
            886
            
            $
            2,389
            
            $
            1,365




(a)
      The
      fair market value of the company’s interest rate swaps have increased by $500
      ($300 net of $200 taxes) since December 31, 2005, due to rising interest
      rates.




**10.**  **Subsequent
      Event**








On
      July 7,
      2006, subsequent to the close of the second quarter, the company received $1.6
      million from Keystone Redevelopment Partners, LLC (“Keystone”) in consideration
      for granting Keystone an option to acquire the company’s Fox Street property on
      which its corporate offices and distribution center are situated (“the
      Property”). If Keystone exercises its option, the company would sell the
      Property for an additional $14.4 million in accordance with the terms of the
      Option Agreement. The $1.6 million option price is nonrefundable unless, in
      the
      event the option is exercised by Keystone, the company cannot or does not convey
      good, marketable and insurable fee simple title to the Property to Keystone.





14




**Item
      2.**  **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation**


(000’s,
      except share and per share amounts)


All
      disclosures are pre-tax, unless otherwise noted.





**Results
      of Operations**





**For
      the Thirteen Weeks ended July 1, 2006 and June 25, 2005**





**Overview**





Net
      income
      for the second quarter of 2006 was $1,135 or $0.14 per fully-diluted share.
      Net
      income for the second quarter of 2005 was $886 or $0.11 per fully-diluted share.





**Sales**





Net
      sales
      decreased by 2.7% in the second quarter of 2006 compared to the same quarter
      in
      2005. Net sales during the second quarter of 2006 were affected by the 10.8%
      sales volume decline year-over-year and the mix of sales performance between
      route and non-route sales. Gross sales decreased 2.4% in the second quarter
      of
      2006 versus the same quarter a year ago driven by the sales volume decline
      due
      primarily to the price increase implemented in January 2006.





Route
      net
      sales were down 3.8% in the second quarter 2006 versus 2005, driven by the
      volume decline. However, route sales experienced improved price realization
      as a
      result of the price increase instituted in January 2006 and lower promotional
      spending. Non-route net sales were up 1.0% for the second quarter 2006 compared
      to the same period in 2005. The increase was attributed to the price increase
      of
      January 2006 and higher sales to certain direct customers. Sales in new markets
      through third-party distributors increased but were partially offset by reduced
      distribution in existing markets and allowances in the new markets.





**Cost
      of Sales**





Cost
      of
      sales, excluding depreciation, for the second quarter of 2006 decreased by
      5.6%
      compared to the same period a year ago on the volume decline of 10.8%. Cost
      of
      sales did not decrease in direct proportion to the sales volume percentage
      decline due to increased operating and packaging expenses as a result of
      increased fuel and energy costs.





**Gross
      Margin**





Gross
      margin after depreciation, was 36.0% of net sales for the second quarter of
      2006
      compared to 34.2% in the second quarter 2005. The 1.8 percentage point
      improvement resulted from the improved price realization on route net sales
      during the second quarter of 2006 as a result of the price increase as well
      as
      the move to higher promoted price points, which reduced the rate of promotions.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the second quarter of 2006 decreased
      $107, or 0.8%, compared to the second quarter in 2005. This change was mostly
      attributed to a reduction in headcount and related personnel costs along with
      cost control efforts in other areas. These reductions were partially offset
      by
      significant increases in transportation costs driven by higher fuel
      prices.





**Depreciation**





Depreciation
      expense in the second quarter of 2006 is consistent with the same period a
      year
      ago.





**Non-Operating
      Items**





Other
      income, net increased by $32 in the second quarter of 2006 compared to the
      second quarter of 2005.





Interest
      expense increased by $86 or 26.4%, in the second quarter of 2006 compared to
      the
      second quarter of 2005. This is due to increased borrowing levels resulting
      from
      the impact of the term loan and mortgage loan on the second quarter of 2006
      versus the same period a year ago and higher rates of interest for the portion
      of debt not covered by swap contracts. The company is exposed to market risk
      relative to its interest expense as its notes payable and long-term debt have
      floating interest rates that vary with the conditions in the credit market.





15




The
      effective income tax rate was 36.2% and 33.6% for the thirteen weeks ended
      July
      1, 2006 and June 25, 2005, respectively. These rates compare to a federal
      statutory rate of 34.0%. In 2006, the difference between the effective tax
      rate
      and the statutory rate is the result of adjusting estimates for certain deferred
      tax assets and liabilities, partially offset by the estimated benefits from
      state tax credits. In 2005, the difference between the effective rate and the
      statutory rate was the result of estimated state tax benefits generated from
      the
      state tax losses as well as state tax credits and the net reversal of a portion
      of the company’s tax reserve.





**For
      the Twenty-six Weeks ended July 1, 2006 and June 25, 2005**





**Overview**





Net
      income
      for the twenty-six weeks ended July 1, 2006, was $2,089 or $0.25 per
      fully-diluted share. Net income for the twenty-six weeks ended June 25, 2005,
      was $1,365 or $0.17 per fully-diluted share.





**Sales**





Net
      sales
      increased by 0.7% in the twenty-six weeks ended July 1, 2006, compared to the
      same period in 2005. Gross sales increased 1.3% in the first twenty-six weeks
      of
      2006 versus the same period a year ago driven by a price increase instituted
      in
      January 2006. Sales volume declined 8.0% during this period compared to a year
      ago.





Route
      net
      sales were up 0.3% in the first twenty-six weeks of 2006 versus 2005, reflecting
      the net impact of improved price realization and the related sales volume
      decline. Non-route net sales were up 2.0% for the first twenty-six weeks of
      2006
      compared to the same period in 2005. The increase was attributed to sales from
      new markets entered during 2005 as well as the January 2006 price
      increase.





**Cost
      of Sales**





Cost
      of
      sales, excluding depreciation, for the first twenty-six weeks of 2006 decreased
      by 1.4% compared to the same period a year ago on the volume decline of 8.0%.
      Cost of sales did not decrease in direct proportion to the sales volume
      percentage decline due to increased fuel and energy costs which increased
      manufacturing costs, in-bound freight expenses and packaging costs.





**Gross
      Margin**





Gross
      margin after depreciation, was 35.0% of net sales for the first twenty-six
      weeks
      of 2006 compared to 33.3% in the same period in 2005. The 1.7 percentage point
      improvement resulted primarily from the improved price realization on route
      net
      sales.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the first twenty-six weeks of 2006
      increased $182, or 0.7%, compared to the same period in 2005. This change is
      attributed to increased investment in marketing in the first quarter 2006 and
      increased freight and transportation costs during the first half of 2006
      compared to the same period last year. These increases were partially offset
      by
      a reduction in salaries and related personnel costs.





**Depreciation**





Depreciation
      expense in the first twenty-six weeks of 2006 decreased 8.5% compared to the
      same period a year ago. The higher depreciation expense in 2005 was due to
      the
      accelerated deprecation of the retired ERP system in the first quarter of 2005.





**Non-Operating
      Items**





Other
      income, net, increased by $94 in the first twenty-six weeks of 2006 compared
      to
      2005, primarily due to gain on the sale of a route in the first quarter of
      2006.





Interest
      expense increased by $140 or 19.6%, in the first twenty-six weeks of 2006
      compared to the same period of 2005. This is due to increased borrowing levels
      resulting from the impact of the term loan and mortgage loan on the first




16




twenty-six
      weeks of 2006 versus the same period a year ago, and higher rates of interest
      for the portion of debt not covered by swaps contracts.




The
      effective income tax rate was 36.8% and 29.1% for the twenty-six weeks ended
      July 1, 2006 and June 25, 2005, respectively. These rates compare to a federal
      statutory rate of 34.0%. In 2006, the difference between the effective tax
      rate
      and the statutory rate is the result of adjusting estimates for certain deferred
      tax assets and liabilities, as well as a net increase to the company’s tax
      reserve, partially offset by the estimated benefits from state tax credits.
      In
      2005, the difference between the effective rate and the statutory rate was
      the
      result of estimated state tax benefits generated from the state tax losses
      as
      well as state tax credits and the net reversal of a portion of the company’s tax
      reserve.




**Liquidity
      and Capital Resources**





Current
      assets at July 1, 2006, were $30,344 compared to $29,008 at December 31, 2005,
      and current liabilities at July 1, 2006, were $19,843, relatively flat compared
      to $19,372 at December 31, 2005. The increase in current assets was due to
      a
      decrease in accounts receivable reserves of $610 and an increase of $1,390
      in
      gross accounts receivable. The impact of the increase in net accounts receivable
      was offset by a decrease in prepayments of $542.





Subsequent
      to the close of the second quarter, on July 7, 2006, the company received $1.6
      million from Keystone in consideration for granting Keystone an option to
      acquire the company’s Property on which its corporate offices and distribution
      center are situated. The $1.6 million received was immediately used to reduce
      the company’s debt under its Amended Credit Agreement.





**Cash
      and Cash Equivalents**





Historically,
      the company has been able to generate sufficient amounts of cash from
      operations. Bank borrowings are used to supplement cash flow from operations
      during periods of cyclical shortages. A credit facility is maintained with
      two
      banks and certain capital and operating leases are utilized.





Book
      overdrafts are recorded within current liabilities. Cash flows associated with
      book overdrafts are classified as financing activities. During 2005, the company
      revised the classification for book overdrafts in the Consolidated Balance
      Sheet
      and the Consolidated Statements of Cash Flows. They were previously reported
      as
      an operating activity. The revised classifications have also been reflected
      in
      the comparative prior year amounts for purposes of consistency.





On
      September 13, 2005, the company entered into the Amended Credit Agreement to
      replace its prior credit facility. This Amended Credit Agreement is committed
      until September 2010, in the amount of $35 million, and it eliminated the short
      term portion of the prior credit facility. On September 13, 2005, the company
      also entered into a term loan for $5.3 million. The entire proceeds of the
      term
      loan were used to fund a voluntary contribution to the company’s previously
      frozen DB Plan. On December 20, 2005, the company entered into a mortgage loan
      for $2.15 million and a second term loan for $2.55 million in order to fund
      the
      purchase of the Hunting Park Bakery building and land for $4.7 million from
      the
      DB Plan.





On
      August
      3, 2005, in order to hedge a portion of the company’s exposure to changes in
      interest rates the company entered into a five-year $6 million interest rate
      swap with a fixed LIBOR rate of 4.64%. The company also entered into two
      five-year interest rate swaps for its term loans for $5.3 and $2.55 million
      on
      September 13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99%
      respectively. Also on December 21, 2005, the company entered into a ten- year
      $2.15 million interest rate swap for its mortgage loan with a fixed LIBOR rate
      of 5.08%. The total notional amount for all swaps is $16 million, and the LIBOR
      rates above are subject to an additional credit spread which can range from
      75
      basis points to 140 basis points. It is expected that a one percentage point
      increase in interest rates for the portion not covered by swaps would result
      in
      additional quarterly expense of approximately $28.





Net
      cash
      from operating activities for the twenty-six weeks ended July 1, 2006 increased
      by $6,536 compared to the same period in 2005.  This increase was primarily
      driven by a significant increase in accounts payable, accrued payroll and
      current liabilities compared to the same period in 2005. The accrued liability
      included a $1,200 increased liability for outside packaging while the comparable
      period in 2005 had a $3,200 decrease in accounts payable.





Net
      cash
      used for investing activities for the twenty-six weeks ended July 1, 2006
      increased by $2,315 relative to the same period in 2005.  In the first
      twenty-six weeks of 2006, there was a $2,396 increase in capital expenditures
      relative to the same period in the prior year due primarily to new packaging
      and
      mixing equipment installed in the company’s production
      facilities.





17




Net
      cash
      used for financing activities for the twenty-six weeks ended July 1, 2006
      decreased by $4,340 relative to the comparable period in 2005, driven by reduced
      borrowing levels for working capital.





For
      the
      remainder of 2006, the company anticipates that cash flow from operations,
      along
      with the continued availability of the Amended Credit Agreement, will provide
      sufficient cash to meet operating and financing requirements. ****




**Share-based
      Compensation**





Share-based
      compensation expense recognized in the company’s consolidated statements of
      income for the first quarter of fiscal 2006 includes (i) compensation expense
      for share-based payment awards granted prior to, but not yet vested as of
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with
      the pro forma provisions of FAS 123(R) and (ii) compensation expense for
      share-based payment awards granted subsequent to January 1, 2006, based on
      the
      grant-date fair value estimated in accordance with the provisions of FAS 123(R).
      As share-based compensation expense recognized in the first quarter of fiscal
      2006 is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. Prior to the effective date of FAS 123(R), the company
      applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
      to Employees” and related interpretations for the company’s stock option and
      restricted stock grants. In the company’s pro-forma information required under
      FAS 123 for the periods prior to fiscal 2006, the company accounted for
      forfeitures as they occurred.





On
      May 11,
      2006, 5,000 shares of the company’s common stock were granted as a Restricted
      Stock Award (“RSA”) to a management employee of the company under the Tasty
      Baking Company 1997 Long Term Incentive Plan (“1997 Plan”). On March 24, 2006,
      2,000 shares of the company’s common stock were granted as a RSA to a director.
      On March 1, 2006,
      129,000 shares of the company’s common stock were granted as RSAs to certain
      management employees. With respect to these March 2006 grants, 42,000 shares
      were awarded under the Tasty Baking Company 2003 Long Term Incentive Plan (“2003
      Plan”) and 89,000 shares were awarded under the 1997 Plan. Under the terms of
      each RSA, the recipients will fully vest in their shares 5 years after the
      date
      of the grant date. Recipients of the RSAs forfeit all shares not vested prior
      to
      separation of employment. In 2006, 20,000 shares of this grant were forfeited.
      Recipients of the RSAs are permitted to vote and receive dividends on all shares
      granted. According to IRS regulations, dividends paid on the RSA are treated
      as
      employee compensation for income tax purposes. Total pre-tax compensation
      expense recognized in the consolidated statements of operations for restricted
      stock was $69 and $69 for the thirteen weeks ended July 1, 2006 and June 25,
      2005, respectively. Total pre-tax compensation expense recognized in the
      consolidated statements of operations for restricted stock was $145 and $135
      for
      the twenty-six weeks ended July 1, 2006 and June 25, 2005, respectively.





On
      August
      1, 2005, 10,000 options were granted to two new directors under the 2003 Plan.
      In addition, on May 12, 2005, 1,500 options were granted to employees of the
      company under the 1997 Plan.





On
      October
      29, 2004, 112,000 shares of the company’s common stock were granted as RSAs to
      certain management employees of the company under the 2003 Plan. Under the
      terms
      of the RSAs, recipients will fully vest in their shares 5 years after the grant
      date. Recipients of the RSAs forfeit all shares if not vested prior to
      separation of employment. The terms of the RSAs also provide for accelerated
      vesting. In the event that the closing price of the company’s common stock is at
      least $14 for 10 consecutive trading days, the vesting for the shares will
      shorten to three years, effective either on the tenth consecutive day of a
      $14
      closing price or the third anniversary of the RSAs, whichever is later.
      Recipients of the RSAs forfeit all shares not vested prior to separation of
      employment. In 2005, 30,000 shares of this grant were forfeited. In 2006, 15,000
      shares of this grant were forfeited. Recipients of the RSAs are permitted to
      vote and receive dividends on all shares granted. According to IRS regulations,
      dividends paid on the RSAs are treated as employee compensation for income
      tax
      purposes.





On
      March
      24, 2006, the Board of Directors adopted the Tasty Baking Company 2006 Long
      Term
      Incentive Plan (“2006 Plan”), which was approved by shareholders at the 2006
      Annual Meeting of Shareholders. Under the terms of the 2006 Plan, 350,000 shares
      were authorized for issuance. On July 27, 2006, the Board approved a three-year
      restricted stock program. There were 250,000 shares from the 2006 Plan allocated
      to the program with 50,000 shares allocated to 2006 performance. Milestones
      were
      set for 2006 performance and the Compensation Committee will evaluate progress
      against the milestones in early 2007. It is intended that any restricted shares
      awarded in early 2007 will vest in 2009. The company is evaluating the potential
      financial impact on the 2006 financial statements for this program.





18




Notwithstanding
      the vesting and termination provisions described above, under the terms of
      the
      Change of Control Agreements and Employment Agreements that the company entered
      into with certain executive officers, upon a change of control, the shares
      granted as RSAs vest and any restrictions on outstanding stock options lapse
      immediately. Additionally, under the terms of those agreements, in certain
      change of control circumstances, shares granted as RSAs may vest after
      termination of employment.





A
      summary
      of stock options as of July 1, 2006 is presented below:


**2006****Weighted-Average****Weighted-Average**
              
              **Remaining**
              
              **Aggregate
                  Intrinsic****Shares
                  (000s)**
              
              **Exercise
                  Price**
              
              **Contractual
                  Term**
              
              **Value
                  (000s)**Outstanding
                  at Dec. 31, 2005
              
              
              602
              
              $
              10.51Granted
              
              
              —
              
              
              —Forfeited
              
              
              (52
              )
              $
              10.58Exercised
              
              
              —
              
              
              —Outstanding
                  at April 1, 2006
              
              
              550
              
              $
              10.50
              
              
              6.5
              
              $
              1,318Granted
              
              
              —
              
              
              —Forfeited
              
              
              (24
              )
              $
              11.34Exercised
              
              
              —
              
              
              —Outstanding
                  at July 1, 2006
              
              
              526
              
              $
              10.47
              
              
              6.36
              
              $
              1,258Options
                  exercisable at April 1, 2006
              
              
              550
              
              $
              10.50
              
              
              6.5
              
              $
              1,318Options
                  exercisable at July 1, 2006
              
              
              526
              
              $
              10.47
              
              
              6.36
              
              $
              1,258




As
      of July
      1, 2006, there was no unrecognized compensation related to nonvested stock
      options. For the first twenty-six weeks of 2006, there were no options granted
      and there was no cash received from option exercises. There was no compensation
      expense recognized in the Consolidated Statements of Operations for stock
      options in the twenty-six weeks ended July 1, 2006.





The
      company recognizes expense for restricted stock using the straight-line method
      over the requisite service period. A summary of the restricted stock as of
      July
      1, 2006 is presented below:


**2006****Shares
                  (000s)**
              
              **Weighted
                  -Average Fair Value**Nonvested
                  at December 31, 2005
              
              
              82
              
              $
              8.00Granted
              
              
              131
              
              $
              7.36Forfeited
              
              
              —
              
              
              —Exercised
              
              
              —
              
              
              —Nonvested
                  at April 1, 2006
              
              
              213
              
              $
              7.61Granted
              
              
              5
              
              
              8.98Forfeited
              
              
              (35
              )
              
              7.63Exercised
              
              
              —
              
              
              —Nonvested
                  at July 1, 2006
              
              
              183
              
              $
              7.64




As
      of July
      1, 2006, there was $1.0 million of unrecognized compensation cost related to
      nonvested restricted stock, which is expected to be recognized over a
      weighted-average period of approximately 4.2 years.




**Forward-Looking
      Statements**





Statements
      contained in this Quarterly Report on Form 10-Q, including but not limited
      to
      those under the headings “Risk Factors” and “Management’s Discussion and
      Analysis,” contain "forward-looking statements" within the meaning of the
      Private Securities Litigation Reform Act of 1995, and are subject to the safe
      harbor created by that Act. Such forward-looking statements are based upon
      assumptions by management, as of the date of this Report, including assumptions
      about risks and uncertainties faced by the company. These forward-looking
      statements can be identified by the use of words such as "anticipate,''
      "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,'' "plan,''
      "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is expected
      to'' and other similar terms. They may include comments about legal proceedings,




19




competition
      within the baking industry, concentration of customers, commodity prices,
      manufacturing alternatives and strategy, consumer preferences, long-term
      receivables, inability to develop brand recognition in the company’s expanded
      market, production, distribution and inventory concerns, loss of one or both
      of
      the company’s production facilities, availability of capital, fluctuation in
      interest rates, pension expense and related assumptions, changes in long-term
      corporate bond rates or asset returns that could effect the recognition of
      pension corridor expense or income, governmental regulations, legal proceedings,
      protection of the company’s intellectual property and trade secrets and other
      statements contained herein that are not historical facts.





Because
      such forward-looking statements involve risks and uncertainties, various factors
      could cause actual results to differ materially from those expressed or implied
      by such forward-looking statements, including, but not limited to, changes
      in
      general economic or business conditions nationally and in the company’s primary
      markets, the availability of capital upon terms acceptable to the company,
      the
      availability and pricing of raw materials, the costs to upgrade and enhance
      facilities, the cost to acquire (or lease) and fit-out a new facility and
      relocate thereto, the cost and availability of capital to fund improvements
      or
      new facilities, the level of demand for the company’s products, the outcome of
      legal proceedings to which the company is or may become a party, the actions
      of
      competitors within the packaged food industry, changes in consumer tastes or
      eating habits, the success of business strategies implemented by the company
      to
      meet future challenges, the retention of key employees, and the ability to
      develop and market in a timely and efficient manner new products which are
      accepted by consumers. If any of our assumptions prove incorrect or should
      unanticipated circumstances arise, our actual results could differ materially
      from those anticipated by such forward-looking statements. The differences
      could
      be caused by a number of factors or combination of factors, including, but
      not
      limited to, those factors described in the company’s 2005 Annual Report on Form
      10-K, “Item 1A, Risk Factors.” Readers are strongly encouraged to consider these
      factors when evaluating any such forward-looking statements. The company
      undertakes no obligation to publicly revise or update such statements, except
      as
      required by law. Readers are advised, however, to consult any additional public
      disclosures by the company (such as in the company’s filings with the SEC or in
      company press releases) on related subjects.




**Item
      3.**  **Quantitative
      and Qualitative Disclosures about Market Risk**





For
      information regarding the company’s exposure to certain market risk, see Item
      7A, Quantitative and Qualitative Disclosures about Market Risk, in the 2005
      Annual Report on Form 10-K. There have been no material changes in the company’s
      portfolio of financial instruments or market risk exposures from the fiscal
      2005
      year-end.




**Item
      4.**  **Controls
      and Procedures**





(a)
      Evaluation of Disclosure Controls and Procedures





The
      company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the company’s reports filed or
      submitted pursuant to the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”), is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure at a reasonable assurance level that such
      information is accumulated and communicated to the company’s management,
      including its Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required
      disclosure.





Management
      of the company, including the Chief Executive Officer and Chief Financial
      Officer, conducted an evaluation of the effectiveness of the company’s
      disclosure controls and procedures (as defined in the Exchange Act Rule
      13a-15(e)) as of July 1, 2006. Based upon the evaluation, the Chief Executive
      Officer and the Chief Financial Officer concluded that the company’s disclosure
      controls and procedures were not effective as of July 1, 2006, because of the
      material weaknesses in internal control over financial reporting related to
      (i)
      accounting for income taxes and (ii) controls over invalid journal entries
      as
      fully described in the company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2005.





Management
      performed additional analysis and other post-closing procedures to provide
      reasonable assurance that the company’s Consolidated Financial Statements are
      prepared in accordance with generally accepted accounting principles.
      Accordingly, management believes that the financial statements included in
      this
      report fairly present in all material respects the company’s financial
      condition, results of operations and cash flows for the periods
      presented.




20




(b)
      Changes in Internal Control over Financial Reporting





During
      the
      first quarter of 2006 the company made changes in its internal control over
      financial reporting that materially affected or are reasonably likely to
      materially affect, the company’s internal control over financial reporting. In
      particular, the company implemented certain enhancements to its internal control
      over financial reporting related to the following material weakness described
      in
      the company’s Form 10-K for the fiscal year ended December 31,
      2005:





*Controls
      over Invalid Journal Entries:* Effective
      March 2006, the company implemented a quarterly review by the Controller of
      all
      posted journal entries to ensure that no manual journal entries by unauthorized
      personnel are posted to the General Ledger. Additionally, effective February
      2006, the Controller or Senior Manager of Accounting and Reporting reviews
      every
      balance sheet reconciliation in detail per the published reconciliation
      schedule. These enhancements have not been in place for a sufficient length
      of
      time to allow management to obtain a large enough sample size to complete
      remediation testing on these controls.





During
      the
      period covered by this report, the company has made changes in its internal
      control over financial reporting that have materially affected or are reasonably
      likely to materially affect, the company’s internal control over financial
      reporting. In particular, the company implemented certain enhancements to its
      internal control over financial reporting related to the following material
      weakness described in the company’s Form 10-K for the fiscal year ended December
      31, 2005:





*Controls
      over Accounting for Income Taxes:* Effective
      June 2006, the company retained an outside tax specialist to review, validate
      and improve the company’s tools and processes utilized to ensure compliance with
      SFAS 109, Accounting for Income Taxes. The tax specialist worked with the
      company to develop a new provision calculation model and tax balance sheet
      which
      were validated against the first quarter 2006 tax provision calculation and
      then
      utilized to generate the second quarter 2006 tax provision, notes and
      disclosures reported herein. The company has retained the tax specialist to
      provide ongoing quarterly validation of all tax related financial statement
      line
      items, notes and disclosures. These enhancements have not been in place for
      a
      sufficient length of time to allow management to obtain a large enough sample
      size to complete remediation testing on these controls.





There
      were
      no additional changes in the period covered by this report that materially
      affected or are reasonably likely to materially affect, the company’s internal
      control over financial reporting.





During
      2006, the company expects to implement additional enhancements to its internal
      control over financial reporting related to controls over invalid journal
      entries and general ledger reconciliations described in the company’s Form 10-K
      for the fiscal year ended December 31, 2005. Specifically, the company will
      leverage security controls within the ERP system to limit general ledger journal
      access.





21


**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**PART
      II. OTHER INFORMATION**





**Item
      1A.**  **Risk
      Factors**





Our Annual
      Report on Form 10-K for the fiscal year ended December 31, 2005 (“2005 Form
      10-K”) includes a discussion of certain risks and uncertainties
      facing us, including those risk factors that could cause our
      actual results to differ materially from those stated in forward-looking
      statements contained in this Quarterly Report on Form 10-Q.  The new risk
      factor presented below should be read in conjunction with the risk factors
      and
      information disclosed in our 2005 Form 10-K.  Solely for purposes of
      the risk factors in this Item 1A, the terms “we,” “our,” and “us” refer to
      Tasty Baking Company and its subsidiaries.





Exercise
      of Real Estate Option Could Adversely Affect our Operations


We
      entered
      into an option agreement that gives a third party the right to acquire our
      distribution center and corporate offices.  While we believe that if the
      option is exercised, we will be able to relocate our distribution center and
      corporate offices to an appropriate new facility without a material interruption
      in our business operations, if we are unable to do so it could have an adverse
      impact on our operations, sales and results of operations.




**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**





(a)
            The
                company’s annual meeting of shareholders was held on May 11,
                2006.





(b)
            The
                directors elected at the meeting
                were:




For
              Withheld
              AbstainRonald
                  J. Kozich
              6,726,964
              361,816
              —James
                  E. Ksansnak
              6,730,507
              358,273
              —Charles
                  P. Pizzi
              6,763,747
              325,033
              —




Other
                directors whose terms of office continued after the meeting were
                as
                follows: Fred C. Aldridge, Jr., Mark G. Conish, James C. Hellauer,
                James
                E. Nevels, Judith M. von Seldeneck, and David J.
                West.





(c)
            Other
                matters voted upon at the meeting and the results of the votes were
                as
                follows:




BrokerFor
              Against
              Abstain
              Non-VotesApproval
                  of the Tasty Baking Company2006
                  Long Term Incentive Plan
              4,848,759
              647,951
              79,907
              1,512,163Ratification
                  of PricewaterhouseCoopers LLPas
                  independent registered public accountingfirm
                  for fiscal year ending December 30, 2006
              6,912,191
              131,435
              451,153
              —




**Item
      5.**  **Other
      Information**





In
      January
      2005, approximately 65 maintenance employees voted to be represented by a labor
      union. During the second quarter 2006, a tentative collective bargaining
      agreement was reached which did not have a material impact on the financial
      results of the company.





Subsequent
      to the close of the second quarter, on July 7, 2006, the company received $1.6
      million from Keystone in consideration for granting Keystone an option to
      acquire the company’s Property on which its corporate offices and distribution
      center are situated. If Keystone exercises its option, the company would sell
      the Property for an additional $14.4 million in accordance with the terms of
      the
      Option Agreement. The $1.6 million option price is nonrefundable unless, in
      the
      event the option is exercised by Keystone, the company cannot or does not convey
      good, marketable and insurable fee simple title to the Property to Keystone.





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**Item
      6.**  **Exhibits**





(a)
            Exhibits:





Exhibit
      10.1 - Tasty Baking Company 2006 Long Term Incentive Plan, incorporated herein
      by reference to Appendix A to Tasty Baking Company's definitive proxy statement
      for its Annual Meeting of Shareholders held on May 11, 2006.





Exhibit
      31(a) - Certification of Chief Executive Officer pursuant to Section 302 of
      the
      Sarbanes-Oxley Act of 2002.





Exhibit
      31(b) - Certification of Chief Financial Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.





Exhibit
      32
      - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.





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**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**SIGNATURE**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the company has
      duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.




TASTY
                BAKING COMPANY(Company)August
                7, 2006
            
            /s/
                David S. Marberger(Date)
            
            DAVID
                S. MARBERGEREXECUTIVE
                VICE PRESIDENT ANDCHIEF
                FINANCIAL OFFICER(Principal
                Financial andAccounting
                Officer)




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